Consider the following diagram which shows the money multiplier effects. It starts with you depositing $2,000 into bank A. Assume that all banks do not hold excess reserves. You Deposit $2000 $162 $1458 O $1620 O $1800 Bank A $2000 ↓ Cindy Loan $1800 Reserve $200 Loan $?? Alex Spends $1800 Reserve $?? Bank C Deposits $1620 College Car dealer deposits $1800 spends $1620 Based on the above diagram, the required reserve ratio is 10%. How much can Bank C loan out to Cindy at most? Bank B Bob Reserve $180 Loan $1620

Consider the following diagram which shows the money multiplier effects. It starts with you depositing $2,000 into bank A. Assume that all banks do not hold excess reserves. You Deposit $2000 $162 $1458 O $1620 O $1800 Bank A $2000 ↓ Cindy Loan $1800 Reserve $200 Loan $?? Alex Spends $1800 Reserve $?? Bank C Deposits $1620 College Car dealer deposits $1800 spends $1620 Based on the above diagram, the required reserve ratio is 10%. How much can Bank C loan out to Cindy at most? Bank B Bob Reserve $180 Loan $1620

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The reserve requirement, open market operation and the money supply
If Bank A has $3.8 million in total deposits, $860,000 in total reserves, and faces a 12 percent reserve requirement, the amount of money that Bank A could initially create by loaning out their excess reserves is: O $100,000. O $385,000 $404,000 O $756,800 O $3,366,667
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Macmillan Learning Suppose you win on a scratch-off lottery ticket and you decide to put all of your $2,500 winnings in the bank. The reserve requirement is 10%. What is the maximum possible increase in the money supply as a result of your bank deposit? maximum increase: S 24750 Incorrect Which events could cause the increase in the money supply to be less than its potential? All money loaned out is deposited back into the banking system. Banks decide to keep some excess reserves on hand. Banks choose to loan out all excess reserves. Some loan recipients choose to hold some cash instead of depositing all of it in banks.
Table 14 shows the balance sheet of the Tenth National Bank Assets Liabilities Reserves $517 Deposits $4,136 Loans $3,619 Total: $4,136 Total: $4,136 Refer to Table 14. Assume that this bank lends out its entire excess reserves. If Jerry deposits $426 of cash in a checking account in the Tenth National Bank, what's the maximum change in the money supply in the economy? O $2,982 G O $3,408 O $3,696 O $4,200 O $4,136
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6. The reserve requirement, open market operations, and the moneysupply Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $300. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 5 10 Simple Money Multiplier 20 10 A higher reserve requirement is associated with a smaller Money Supply (Dollars) 6,000 3,000 ▼ to money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations…
5. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $100. Determine the simple deposit multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 15 10 Simple Deposit Multiplier A lower reserve requirement is associated with a Money Supply (Dollars) money supply. Suppose the Federal Reserve wants to increase the money supply by $100. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions.…
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